![]() Of course, the price and the strategy need to make sense, which we will discuss below. We prefer long-term thinking and support Hibbett’s decision to take the other path and strategically invest for future growth and an improved industry positioning. Debt capacity has been used up and won’t be available for growth opportunities or recession-resistance going forward. In what may be a greater concern long-term for the US economy as a whole, listed companies seem more set on increasing their share price today than securing their strategic viability going forward (or perhaps industry concentration means they don’t have to?). And corporations are raising debt to incredible levels to make investments which increase earnings per share (EPS) now, but which also have no potential to produce future growth or stronger strategic positioning (as capital expenditures might). So corporations clearly prefer investing in buybacks rather than productive assets currently. ![]() S&P 500 buybacks are expected to climb by another 22% in 2019, to $940 billion, versus ‘only’ $715 billion expected to be spent on capital expenditures. According to Goldman Sachs estimates, stock buybacks at the perimeter of the S&P 500 increased a massive 48% yoy to $770 billion in 2018, up from approximately $520 billion in 2017. Investors applaud companies as they raise debt and pile the cash into buying back company shares. ![]() The investment world today is heavily focused on buybacks and other financial transactions that are more one-off and short term in nature. The best place to start is simply on the strategic value of the two different asset allocation options. But after reviewing the transaction, we feel there are good arguments for preferring City Gear over buybacks. And there may be good reason to think that way, if just considering the short-term. Many investors have the opinion that share buybacks at current valuations would have been a better use of cash than the acquisition. We assumed the company would plough as much cash as possible into buying back over 10% of market cap this year and were surprised to see the City Gear acquisition squash that possibility. When the City Gear transaction was announced, Hibbett was trading around book value, so much of that buyback activity happened at higher valuations than were available this year (Hibbett’s long-term average book value is closer to 3.5x). And the company had guidance to buyback an additional $40 – $50 million in the current year before the City Gear transaction was announced. It has done so at an average pace of over $50 million a year for the past 5 years, not bad for a company with a market capitalization below $300 million currently. Hibbett loves to buy back its own shares. Source: Hibbett Sports Investor Presentation – Acquisition of City Gear, October 2018 Why buy a competitor for higher multiples than where your own shares are trading? Why not keep the cash in preparation for tough times ahead? While many of these questions do support multiple opinions, we will walk through some of the main reasons why we think the City Gear transaction, including the price paid, made sense and also why Hibbett’s overall investment strategy should satisfy long-term investors. After all, Hibbett’s own stock was trading at depressed levels, meaning share buybacks were a legitimate option. Discussions arose on whether or not the acquisition was the most effective way to put the company’s abundant cash to work or if the price was right. Hibbett has been dealing with profitability pressure and doesn’t have a history of making acquisitions, so the transaction raised more than a few eyebrows. Many investors were surprised when Hibbett Sports bought its smaller rival City Gear. Hibbett Sports ( NASDAQ: HIBB) is a good example of such a company, and the recent City Gear acquisition is a good example of investing for the future. A key criteria for us to consider investment is whether or not the company is making smart investments in its long-term future (and has the capital to do so) to emerge as a winner after the retail turbulence. The sustainability of the companies’ market position and resulting value creation is also critical, even if harder to predict. We focus on retail companies that have a long history of value creation (through high return on invested capital) that have balance sheets strong enough to weather the current retail storm or an impending recession. We are fully aware of the current challenges in retail, which certainly demand discipline regarding position sizing and diversification, but we also see some excellent opportunities for long-term investors resulting from the uncertainty created by these challenges.
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